The Unassuming Economist

Roads or schools? It’s a question akin to the “guns or butter” choice that governments around the world confronted in the 20^th century: How to spend a nation’s finite resources to produce the maximum benefit for its people. A new IMF working paper finds that low-income countries tend to spend less on schools than on roads as a share of GDP.

“In the presence of distortionary taxation and debt aversion, the different pace at which roads and schools contribute to economic growth turns out to be central to this decision. Specifically, while costs are front-loaded for both types of investment, the growth benefits of schools accrue with a delay. To put things in perspective, with a ‘big push’, even assuming a large (15 percent) return differential in favor of schools, the government would still limit the fraction of the investment scale-up going to schools to about a half. Besides debt aversion, political myopia also turns out to be a crucial determinant of public investment composition. A ‘big push’, by accelerating growth outcomes, mitigates myopia—but at the expense of greater risks to fiscal and debt sustainability. Tied concessional financing and grants can potentially mitigate the adverse effects of both debt aversion and political myopia”

From a new IMF working paper: “In this study, we document the decline in income inequality and a convergence in consumption patterns in Brazilian states in a new database constructed from micro data from the national households’ survey. We adjust the state-Gini coefficients for spatial price differences using information on households’ rental prices available in the survey. In a panel regression framework, we find that labor income growth, formalization, and schooling contributed to the decline in inequality during 2004−14, but redistributive policies, such as Bolsa Família, have also played a positive role. Going forward, it will be important to phase out untargeted subsidies, such as public spending on tertiary education, and contain growth of public sector wages, to improve budgetary efficiency and protect gains in equality.”

From a new IMF working paper by Davide Furceri and Grace Li:

“This paper provides new empirical evidence of the macroeconomic effects of public investment in developing economies. Using public investment forecast errors to identify unanticipated changes in public investment, the paper finds that increased public investment raises output in the short and medium term, with an average short-term fiscal multiplier of about 0.2. We find some evidence that the effects are larger: (i) during periods of slack; (ii) in economies operating with fixed exchange rate regimes; (iii) in more closed economies; (iv) in countries with lower public debt; and (v) in countries with higher investment efficiency. Finally, we show that increases in public investment tend to lower income inequality.”

My paper with Davide Furceri on the effects of capital account liberalization on inequality is now forthcoming in the Journal of Development Economics and is available (link) at the JDE website. We find that capital account liberalization is associated with a persistent increase in the share of income going to the top. We investigate three channels through which these impacts could occur. First, the impact of liberalization on inequality is stronger where credit markets lack depth and financial inclusion is low; positive impacts of liberalization on poverty rates also vanish when financial inclusion is low. Second, the impact on inequality is also stronger when liberalization is followed by a financial crisis. Third, liberalization seems to alter the relative bargaining power of firms and workers: the labor share of income falls in the aftermath of capital account liberalization. For those without access to the JDE, an earlier working paper (link) version is available.

Figure 10. The effect of capital account liberalization on the top income shares

From the opening remarks of Vitor Gaspar, Director of the Fiscal Affairs Department:

“This issue of the Fiscal Monitor looks at inequality. First, it documents trends in inequality and examines the role of fiscal policy. Then, it examines the following three policies that are currently widely debated: first, progressive taxation; second, universal basic income (UBI); and third, public spending on education and health.”

Continue reading here.